The ethanol industry, once the darling of corn
growers, environmentalists and the auto industry, has fallen on hard times.
Producers spent this year caught between falling ethanol prices and rising corn
costs, causing many to go bankrupt. In response, they are pushing the
Environmental Protection Agency to increase the amount of ethanol they can
blend into gasoline to 15 percent, up from the current 10 percent. Allowing
this, however, would only double down on a discredited environmental policy
without solving the industry's fundamental economic problem.

That problem is simple: Ethanol prices trend
higher and lower along with the price of gasoline, yet the cost of producing
ethanol tends to rise with demand, since higher ethanol production exerts
upward pressure on the price of corn. In a free market, corn prices might be
expected to eventually fall as the market adjusts to increased demand. But
because the government heavily promotes ethanol use through subsidies and
regulation, the market is continually strained.

The problem is magnified because corn is a water —
and fertilizer — intensive crop that requires considerable investment. Worse,
since fertilizer is often an oil-based product, the cost of growing corn tends
to rise at the very moment ethanol prices, which rise with oil prices, might
bring a good return.

The ethanol industry has less incentive to
control its costs and diversify its market as long as the federal government
guarantees it a place at the pump. Yet Congress's solution to the plight of
ethanol suppliers has been to mandate more ethanol use in gasoline. The Energy
Independence and Security Act of 2007 mandated that use of renewable
transportation fuel rise from nine billion gallons last year to 36 billion
gallons in 2022. Although some of this mandate must be met by advanced biofuels
from switchgrass and other sources, corn-produced ethanol is the only
large-scale alternative fuel currently available to meet Congress's mandate.

The ethanol industry appears to recognize that
without government mandates there can be no sustainable market, hence the push
for 15 percent ethanol fuel. But we should be wary on several grounds. First,
many researchers are convinced that 15 percent ethanol in gasoline will cause
problems in small engines in everything from lawnmowers to portable generators
and boats. Some car engines will most likely tolerate the higher blend of
ethanol, but others — especially those in older vehicles — will require costly
repairs, a hardship likely to be borne by lower-income Americans.

Second, if ethanol use was really helping the
environment, it might be worth putting up with higher costs. But many
environmental groups dropped their support for corn-based ethanol after two
studies published by the journal Science last February concluded that ethanol
production actually increases the amount of carbon dioxide released into the
atmosphere. The main culprit is large-scale conversion of forest and grassland
to corn production. Researchers at Princeton University estimate it would take
167 years of ethanol use in cars to offset the release of carbon from
converting lands to agricultural production.

Third, a 2008 report prepared for the World Bank
concluded that "the most important factor" in rising global food prices "was
the large increase in biofuels production in the U.S. and the E.U." High food
prices may be a hardship for American consumers, but they are downright deadly
in poor African nations.

Last, Washington already protects American
companies with a 54 cent per gallon tariff on sugar cane ethanol from Brazil
and other countries that produce it at much lower costs than American farmers
can. This tariff not only hits United States motorists in the pocketbook, it
also leads to other mischief. An entire industry designed to evade the
protectionist tax has cropped up in Trinidad and 23 other Caribbean countries
that are exempt from the tariff. Trinidadian companies import sugar cane
ethanol from Brazil, dehydrate it to comply with the American tariff exemption
on products "substantially transformed" in the Caribbean Basin, and then sell it
in America.

Allowing a higher percentage of ethanol in
gasoline will not make us less dependent on such foreign energy sources. It
will not help the environment. It will not lower consumer prices. And it will
result in the poor of the world having less to eat. Instead of raising federal
mandates on ethanol, Congress and the Obama administration should end them
entirely.

#####

Russ Harding is senior environmental analyst at
the Mackinac Center for Public Policy, a research and educational institute
headquartered in Midland, Mich. Permission to reprint in whole or in part is
hereby granted, provided that the author and the Center are properly cited.